Romania Industrial Output February 2008

Romanian industrial output was up in February by 7.7% on February 2007 and by a seasonally adjusted 1.3% on January according to data released today by the Romanian Statistics Office (INSSE).

Romanian Building Permits February 2008

The Romanian government issued 4,096 homebuilding permits last month, compared with 3,169 in February 2007, which was a year on year increase of 29.3 percent, according to data released this morning by the National Statistics Institute (INSSE).

Rising wages, which increased an annual 31 percent in January, and consumer lending, which saw private debt grow more than 60 percent over the same period, have been significant factors in fuelling construction in Romania, as have remittances sent back from the large number of Romanian migrants working in Spain and Italy.

In January, the value of construction works rose by an annual 30 percent, spurred by an increase in government-sponsored engineering works and more commercial real estate development as foreign companies entered the country according to INSSE:

Romanian Central Bank Raises Interest Rates Again

Romania's central bank raised its main interest rate, the highest in the European Union, by half a percentage point as inflation threatens to accelerate and the local currency weakens. The Banca Nationala a Romaniei increased its Monetary Policy Rate to 9.5 percent today. Policy makers also made clear that they are ready to raise rates further if they feel that this is necessary. The leu rose 0.1 percent to 3.7157 against the euro after the decision today, from 3.7179 late yesterday. In fact the leu had previously weakened 2.3 percent since February 4, when the central bank last raised its interest rate. The leu's drop makes items prices in euros more expensive. In Romania, rent, gasoline, phone bills and other goods and services are quoted in euros and paid in lei. The question we all need to ask ourselves here is whether the Romanian authorities are about to discover - in the context of interest rates and the need to defend the leu - that "what goes up, doesn't necessarily come down again".

The central bank will ``closely monitor developments in macroeconomic indicators and assess their outlook, standing ready to adjust instrument settings to counteract inflationary pressures,''

The bank has raised rates at every meeting since October to counter rising prices. Inflation in February was the fastest in two years as a drought boosted food prices and a weaker leu raised the cost of imports and services.The inflation rate rose to 8 percent in February, the highest since March of 2006, from 7.3 percent in January and 6.6 percent in December, the National Statistics Institute said on March 11.





The central bank also said inflation will likely remain above its targets ``in the following months'' because of higher food and fuel prices. It set its next rate decision for May 6.

One of the issues that all of this raises is the extent to which any local tightening policy can work at all whil private indebtedness - which grew an annual rate of 66.8% percent in January - continues to be fuelled by foreign exchange denominated (largely euro) cheaper interest loans, which grew at an astonishing and alarming 143.4% annual rate year on year in January. If you look at the chart below you will see that the level of leu denominated loans is virtually stationary, while the forex ones go through the roof. This situation reduces the central bank to the a role of a virtually impotent bystander.

Romania Consumer Inflation February 2008

Romania's inflation accelerated in February to the fastest pace in two years, increasing the chances of another interest rate increase, as the government raised natural gas prices and a weaker leu boosted the cost of services. The inflation rate rose to 8 percent, the highest since March of 2006, and up from 7.3 percent in January, according to the Bucharest-based National Statistics Institute earlier today. Consumer prices rose 0.7 percent in the month, from 0.9 percent in January.



The government gave the go ahead for an 8.5 percent increase in the price of natural gas starting Feb. 1. Food costs have risen particularly rapidly in Romania partly as a result of a drought that destroyed a third of Romania's crops before last autumn's harvest. The inflation problem is partly aggravated by fluctuations in the value of the leu, which has fallen by 16 percent against the euro since August, making goods and services gauged in foreign currencies more expensive. In Romania, telephone bills, gas rent and other items are quoted in euros and paid in lei. The price of services, which is the area that is most susceptible to changes in the value of the leu, increased by an annual 9.9 percent in February as food costs rose 10.2 percent and the prices for non- food goods rose 5.3 percent.



The National Bank of Romania, which raised its main interest rate 1 percentage point to 9 percent last month, is rightly concerned the inflation rate may remain high in the first half because of the weaker leu, wage increases that exceeded an annual 30 percent in January, a consumer lending boom and sizeable government spending. The central bank is scheduled to make its next interest-rate decision on March 26.

The central bank on Feb. 7 raised its end-year inflation forecast to an annual 5.9 percent, from a previous forecast of 4.3 percent, meaning it expects to miss its end-year inflation target of 3 percent, plus or minus a percentage point.

Romanian Wage Growth January 2008

Romania's leu continued its rise against the euro for the fourth consecutive day yesterday after a report from the statistics depaterment showed wages growth accelerated again in January, increasing speculation that the central bank will raise what is already the European Union's highest interest rate.

Net wage growth accelerated to an annual 30.7 percent in January, from 15.2 percent in December, bringing the average monthly wage to 1,200 lei ($496).



Romania's central bank has highlighted wage growth is a main driver of inflation and the main threat to this year's inflation forecast. Romania's key lending rate is currently 9 percent.




As I said above,the leu advance continued yesterday, and it rose by as much as 1 percent to 3.6745 per euro, its highest level in a week, although it had fallen back to 3.6982 by 12:16 p.m. in Bucharest, still up from 3.7123 late Wednesday.

Obviously this whole situation is very "perverse" since the leu is being driven up by expectations of extra yield given that the bank may well have to raise rates. The problem is that the excess inflation means that in the longer term the leu is likely to depreciate rather than appreciate - perhpas towards the 3.80-3.90 range - and that under these circumstances, and when the domestic demand driven overheating has died down the bank may well (like its Hungarian equivalent) be forced to maintain higher than desireable interst rates simply to protect the currency and attract the funds needed to cover the current account deficit, which, given its magnitude, one would surely not wish to see unwind overnight.


In another sign of the continuing overheating, INSSE also reported yesterday that construction activity increased in January by 29.5% over January 2007, up from the 28.2% increase in December.